My current employer doesn't provide a 401k. So I'm guessing I'm eligible to open a traditional IRA and contribute up to $5500 (or the statutory limit).

What if I max out my contributions to my IRA and later in the year (say in Aug 2017), I switch to an employer who does provide a 401k. Will that make me pay a fine for the traditional IRA that I have opened back when my employer did not provide me a 401k?

2 Answers
2

What if I max out my contributions to my IRA and later in the year
(say in Aug 2017), I switch to an employer who does provide a 401k.
Will that make me pay a fine for the traditional IRA that I have
opened back when my employer did not provide me a 401k?

There is no income limit for contributing to a Traditional IRA. As long as you make at least $5500 that year, you can contribute $5500 to a Traditional IRA regardless of how high your income is and regardless of whether you contributed to a 401(k) that year. Therefore, you will not have an "excess contribution" that would trigger a penalty if you didn't withdraw it.

However, if you or your spouse contributed to a 401(k) that year, then there is an income limit on your ability to deduct a Traditional IRA contribution. So if you contribute (not just have one, but contribute, by either you or the employer) to the 401(k) from the new employer during the year, then you may suddenly find yourself unable to deduct the Traditional IRA contribution you made earlier when you file taxes for the year, which basically means it's a "non-deductible" Traditional IRA contribution.

A few additions: if you can't deduct a trad contribution, you may be able to recharacterize it as Roth (there are income limits there also, but higher, and if not you can convert the nondeductible trad to Roth, called 'backdoor' -- but that's more complicated if you have any other trad IRA) or you can 'undo' an IRA contribution by withdrawing (NOT distributing, tell the custodian) the contributed amount plus attributable earnings (which are taxed) by the filing deadline (next April 15-ish or Oct. 15-ish with extension)
– dave_thompson_085Apr 19 '17 at 21:15

You can fund a 401(k) (or other employer-sponsored plan, including a
SEP-IRA) and a Roth IRA. This enables you to save more, and gives you
the tax flexibility mentioned above. You can also throw a traditional
IRA into that mix.

As long as you don't over fund each account:

The 2017 contribution limit for a 401(k) is $18,000; $24,000 if you’re
50 and over.

Then you can also deposit up to $5,500 in a Roth or traditional IRA
for 2017 ($6,500 if you’re 50 and up). That’s the combined limit for
both types of IRAs, by the way. You can’t put, say, $5,500 each into
an IRA and a Roth IRA.